Q2 2023 Manulife Financial Corporation Earnings Call
This conference is being recorded physical sales at all or as you see.
All participants please standby your meeting is ready to begin please be advised that this conference call is being recorded.
And welcome to the Manulife financial second quarter 2020 financial results Conference call. Your host for today will be Mr. Hong Kong. Please go ahead Mr. <unk>.
Thank you welcome to in many ways earnings conference call to discuss our second quarter and year to date 2023 financial and operating results.
Earnings materials, including the webcast slides for today's call are available on the Investor Relations section of our website at <unk> Dot com.
Turning to slide four we will begin today's presentation with an overview of our second quarter results and strategic update by Roy Gori, Our President and Chief Executive Officer. Following <unk> remarks, Colin Simpson, our Chief Financial Officer will discuss the Companys financial and operating results. After the prepared remarks, we move to the Q&A portion of the call.
We ask each participant adhere to a limit of two questions, including follow up questions. If you're happy to you just two questions. Please requeue and we will do our best to respond to everyone.
Let me start please refer to slide two if we caution on forward looking statements note that certain material factors or assumptions applied in making forward looking statements and actual results may differ materially from what is stated.
I would also referred you to slide 38, we note on a non-GAAP and other financial measures used in this presentation, which includes an explanation of our use of traditional results for 2022 comparison.
I'd like to turn the call over to Roy Gori, Our President and Chief Executive Officer right.
Thanks, Tom and thank you everyone for joining us today.
Yesterday, we announced our second quarter 2023 financial results.
In our second quarterly reporting under Ive for 17, we delivered strong operating results, including core earnings of $1 6 billion net.
Net income of $1 billion strong growth in EPS and core EPS and core ROE of 15, 5%.
I'm encouraged by the strong top line momentum that we're building across our new business metrics.
With double digit growth in IP, South MBV, and new business CSM compared with 2022.
We also generated global Wham net inflows of $2 2 billion.
IP sales increased by 12% from the prior year quarter led by Asia.
<unk> sales increased 26% year on year as.
As we capitalized on the post pandemic recovery in the region.
The strong sales supported a 10% increase in MBV and a 15% increase in our new business CSM.
The increase in new business CSM was in line with our medium term target.
The strong growth in new business CSM, particularly in Asia gives us confidence in the future growth of our insurance service results.
Turning to slide seven.
Our strong core earnings of $1 $6 billion were up 4% from the prior year quarter as growth across our insurance and corporate segments was partially offset by a decline in global Wang.
Our continued capital deployment through share buybacks contributed to our core EPS growing 6% from the prior year quarter.
Net income of $1 billion was impacted by lower than expected returns on our ALDA portfolio.
While some of the older classes are facing headwinds we continued to generate overall positive return from the portfolio.
We also delivered strong core ROE of 15, 5%, which is in line with our medium term target of 15% plus.
Turning to slide eight we continue to maintain a strong capital position supported by a light cat ratio of 136% and a leverage ratio of 25, 8%.
We also reported adjusted book value per share of $29 and <unk> 42.
A 5% increase from the prior year quarter over a period that had sizable interest rate movements and during which we returned significant capital to shareholders.
While this amount was modestly down from the first quarter. The majority of the decline was attributed to the currency translation of foreign operations, which does not reflect the fundamental performance of our business.
This graph is a great illustration of the strength and stability of our adjusted book value under <unk> 17.
Turning to slide nine overall.
Overall, we have a very attractive business mix, including exposure to the emerging middle class in Asia, and the developed North American economies as well as the scaled global asset manager.
And the three mega trends that underpin our business remain unchanged.
A growing middle class in Asia, and aging population and Digitization of the consumer.
We are strongly positioned to capitalize on these opportunities and the momentum that we generated in the quarter is an illustration of our growth potential.
In Asia. The team is capturing the opportunity as the region continues to recover from the pandemic.
I'm really excited that Phil Witherington, formerly CFO returned to Asia in July to lead the business.
<unk> has a deep appreciation of our Asia franchise, having previously served as Manulife Asia as interim CEO as well as its CFO .
In the short time that he's been there we are seeing strong momentum building in our Asia businesses in the third quarter.
Our top line metrics bode well for the future earnings growth of the segment.
I am confident that Phil will lead our team and double down on our growth ambitions in the region and easier on the call with us today.
I would also like to thank Damian green, whose transition to the position of chair of Manulife financial Asia for his leadership.
And global Wham, we delivered strong net inflows of $6 6 billion in the first half of 2023 supported by our unique business profile, which is diversified by geography and business line.
We've maintained strong sales rankings in many of our key markets, including the number one spot in Canada, and Hong Kong retirement and number two in the U S mid case retirement market.
Core earnings were down from the prior year period due in part to higher investments as we strive to continue building new business.
However, I'm encouraged to see is building momentum.
With our core earnings improving 12% and core EBITDA margin improving by two two percentage points from the first quarter.
As part of delivering value to shareholders, we're committed to helping our customers live longer healthier better lives.
And we're executing against our ESG strategy and commitments.
In Hong Kong, we launched enhanced healthcare coverage to better address the growing demand for health and protection services.
In Canada, we further expanded our behavioral insurance program, making manulife vitality available on new Manulife par individual insurance policies.
And currently our own timberland and agriculture properties already removed more carbon from the atmosphere than our operations Amit.
We strengthened our commitment to reducing emissions by disclosing science based targets, including an increased ambition to reduce absolute scope, one and two emissions 40% by 2035.
This is all part of our commitment to helping make decisions easier and lives better which will drive value for shareholders.
And finally since we resumed our share buyback program in 2022, our strong capital position has enabled us to return over $6 $6 billion of capital to shareholders through dividends and share buybacks, including more than $440 million of share buybacks during the second quarter.
As of the end of June we still had capacity to purchase approximately 30 million common shares under our current <unk> program.
Overall, it was a very encouraging quarter with strong top line momentum and our strong sales performance leaves me optimistic for the future.
With that I'm happy to turn it over to Colin Simpson, who has succeeded Phil as our group Chief Financial Officer.
Colin brings a wealth of experience within the insurance industry.
You'll get some I'll call them very well as we intensify our focus to generate value for our shareholders and customers.
With that I'll hand, it over to Colin.
Thanks, Roy I wanted to start by saying I'm really excited to take on this role I truly believe manulife has an enviable portfolio of businesses and incredible potential and as I get my feet under the desk I look forward to connecting with the investment community.
I'll start on slide 11, which shows a snapshot of our financial Kpis for the second quarter of 2023.
We delivered strong results core EPS increased 6% and we generated strong momentum in our top line metrics with AP sales new business value of new business CSM each up by double digits. We also delivered positive global web net flows of $2 2 billion.
Our balance sheet remains strong with 5% growth in adjusted book value per share and a light cat ratio of 136% provides ample financial flexibility.
Moving to our topline and turning to slide 12, we generated sales of $1 6 billion and new business value of $585 million.
New business CSM of $592 million increased 15% from the prior year, which is a step up from the first quarter 2023 growth rate and in line with our medium term target.
Asia led AP sales growth fueled by Hong Kong, where AP sales doubled primarily due to a return of demand from mainland Chinese visitors I will say the emergence from the pandemic has been uneven across our operating regions in Asia, but momentum is encouraging with 26% growth in new business CSM.
In Canada sales declined 11% driven by lower group insurance sales as the prior year included very strong large case sales in segregated fund products, which was broadly consistent with the industry.
Despite the decline in sales in Canada, New business CSM increased 21%.
In the U S. AP sales declined 15%, we continue to see higher short term interest rates attract customers away from longer duration accumulation products, particularly for our high net worth customers, which is a target market for John Hancock, but we have maintained pricing discipline in a competitive environment and we saw quarter on quarter growth in both new business.
And new business CSM.
Slide 13 illustrates the changes in contractual service margin balanced, which is an important store of future profits and die for 17. During the first half of 2023, the contribution from new insurance business unexpected CSM role forward exceeded the CSM recognized for service provided which sets the foundation.
<unk> for organic CSM growth.
This was partially offset by insurance experience reported through the CSM of $127 million.
Unfavorable lapse experience in the U S and persistency in Asia, and emerging markets outweighed favorable long term care experience as a reminder, under our FY 2017 is important to consider insurance experience through both core earnings and the CSM a holistic view is available in the appendix of this presentation.
I would add because I know it is a focal point for some that LTC experience was a modest net gain this quarter across core earnings and CSM combined.
Putting this all together organic growth in CSM was 3% during the first half of 2023, 5% on an annualized basis.
Inorganic CSM movement, which is influenced by market impacts declined by $342 million over the same time period, largely driven by foreign exchange rate movements, which are not reflective of the fundamental business performance overall, the total CSM balance increased 4% in the first half of 2023 on a constant exchange rate basis, and we remain.
On achieving our medium term CSM growth target of 10%.
Turning to slide 14, our global <unk> business recorded net inflows of $2 2 billion up from $1 7 billion in the prior year, we experienced lower mutual fund redemption rates, which improved retail fund flows. The prior year also benefited from a $1 9 billion institutional equity mandate.
<unk>.
Overall global ones average assets under management and administration increased by 1% driven by the acquisition of full ownership interest in Manulife Fund management in mainland China, which in itself is an exciting opportunity for us.
Net fee income yield of 44 basis points increased modestly, reflecting higher fee spread and a change in business mix.
We've been investing in our global lab business, resulting in higher expenses and you can see that the core EBITDA margin decreased 350 basis points to 24, 6%. This was also slightly impacted by lower earnings from C capsule as we repatriated funds.
Moving to slide 15, which shows our drivers of earnings analysis, which we are showing relative to the prior year and prior quarter to give you a sense of our progress. The first area I'd like to focus on is how higher interest rates all flowing through core earnings.
You'll notice higher expected investment earnings driven by higher investment rates in fixed income securities as well as business growth.
In addition, we earn more interest on surplus in the high yield environment. These two factors are partially offset by higher debt costs, which you can see in other core earnings and slowest CSM amortization on certain BFA or variable fee approach contracts impacting the overall insurance service resolve the.
The second point to draw from this slide is on insurance experience, which shows a modest experienced loss of $22 million.
The prior year quarter had a significant benefit in U S life during a period of volatile mortality related to Covid.
Finally, you will notice that our expected credit losses neutral this quarter, which is a significant improvement on the charge in the first quarter.
Slide 16 shows our earnings reconciliation to net income attributed to shareholders for the second quarter. Despite the improvement from the prior year quarter transitional net income there was a $570 million market experienced net charge. This included a $478 million charge from lower than expected returns on all.
Largely driven by real estate and energy related private equity investments.
$141 million adverse other investment resolved, mostly reflects a change in the Japanese yen currency rate, which saw a sizeable movement during the quarter.
Note that while we reported a net all the charge, reflecting challenges faced by certain asset classes. The portfolio generated a positive return in the quarter, albeit below our long term expectation.
The commercial real estate market continues to be difficult in recent quarters, we've seen capitalization rates rise as interest rates have increased adversely impacted valuations. It is worth reiterating that the vast majority of our real estate portfolios independently appraised on a quarterly basis, so while difficult conditions persist in the office commercial real estate market, we believe our.
Evaluations occurring for example, our most recent valuations on our U S office portfolio reflect an approximately 30% reduction from peak.
I would also note that over the past decade, North American office exposure has decreased from over 40% of all the 2013 to close to 10% today.
Turning to slide 17, and our ALDA portfolio.
Returns have been lower than recent quarters, but we invest in asset classes that are well suited for insurance liabilities and generate attractive returns with lower volatility relative to both equity and credit indices over a medium to long time period. In 2020. For example, all the portfolio generated a $1 $4 billion loss relative to expectations. So we more than recovered that loss in <unk>.
'twenty, one and then the five years preceding 2023, the portfolio outperformed our assumed returns on a net basis during a volatile period that included the pandemic.
Over the years Manulife has built up strong asset origination and management capabilities, which I view as a competitive advantage. The historic return profile, which we show on this slide gives us confidence in achieving our expected long term returns.
We've also added a slide in the appendix to show all the performance over the past five years.
Moving to slide 18, we delivered core ROE of 15, 5% in line with our medium term target of 15% plus and when you consider our current valuation I believe a mid teens ROE coupled with improved stability of earnings and book value offers investors a significant value.
This is a key factor in our decision to remain active in our share buyback program and during the quarter, we purchased for cancellation nearly 1% of our outstanding common shares for over $440 million and you can see we've steadily returning capital to shareholders over the past five quarters. This has contributed to the expansion of our core Roe.
Onto slide 19, we continue to maintain a strong balance sheet and capital position. This underpins our commitment we make to our customers with every policy sold and gives us financial flexibility at the end of the quarter, we had $21 billion of capital above our supervisory target ratio and unlike cat ratio of 130.
6% remains robust the.
The two percentage point decrease in our like that ratio in the second quarter was primarily driven by the redemption of subordinated debt and share buybacks, which also drove a net 0.2 percentage point reduction in our financial leverage ratio.
And finally, moving to slide 21, which shows how we're tracking against our medium term targets.
Core EPS growth has been solid in the first half of the year that is slightly below our target core ROE of 15, 2% year to date is in line with our medium term target and although our CSM metrics have performed below target in the first half we built strong momentum in the second quarter, including new business CSM growth of 15%.
We've delivered strong results in the first half of 2023 and are well positioned to deliver for our customers shareholders and colleagues.
This concludes our prepared remarks before we move to the Q&A session I'd like to remind each participant to adhere to a limit of two questions, including follow ups and to re queue. If they have additional questions. Operator, we will now open the call to questions.
Thank you.
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Our first question is from many Goldman from Scotiabank. Please go ahead.
Hi, Good morning, first question I wanted to ask about.
Expected investment earnings, we're seeing a big improvement sequentially, and then very very strong growth.
Year over year, I'm, just trying to understand the sustainability and the potential variability in that number going forward I guess the first question is what we're seeing from a year over year basis. Its really just a function of the higher rate environment.
Some other key factors that we should keep in mind and as we look forward. If we assume that the rate environment. Maybe is peak to some extent what does that mean about the trajectory.
<unk> line item going forward.
Yes, Hi, Manny its Colin.
Kick off and others can join in.
What you're seeing is absolutely as you intimated high yields and we're looking at and through core earnings to the extent that you will stay where they are we would expect this to persist absolutely sustainable yield go up even further then we would expect to earn more through that line item.
Yeah clean.
Sorry, just as Scott to add a bit to that whats driving it is the higher rate environment and as Colin said if rates stay where they are.
Expect it to be sustainable and in fact, even grow a bit as the portfolio turns over we will be turning it over and higher yields.
And how does the inversion of the yield curve is that playing a factor here in terms of.
This line item behaves.
So how should we think about sort of the.
The sort of the shape of the yield curve in terms of what the impact is on this line item.
Okay.
While the yield curve is inverted all yields are higher.
Then that exist on the current portfolio. So that's that's all positive.
Okay got it thank you.
Thank you.
Our following question is from Paul Holden from CIBC. Please go ahead.
Thank you good morning, so strong results at our Hong Kong sales as you highlighted and then you also mentioned.
<unk> positive momentum in Q3, I guess, what I want to understand their betters just personally read here.
Talks about sort of the stall of the consumer.
Coverage in China.
So I'm wondering how we square those two factors and then also wanted to understand with Q2 like an abnormally strong quarter because of a little bit of a catch up based on.
Pent up demand or do you think there is momentum based off of that run rate.
Hey, Paul it's Phil. Thank you for the question can I just start by saying how fantastic fantastic It seems to be back on the ground in Hong Kong and in this role representing our Asia segment and pull that leads me into your question. There is a lot of media.
Talking down the conditions in Hong Kong, and China, but the reality is being on the ground.
A tremendous amount of activity and it feels to me very much like it did pre pandemic and I think youre seeing that in our performance in the second quarter.
<unk>, 6% growth in <unk> across Asia, translating to a 26% growth in new business CSM I think that's very encouraging and of course as we've said before that CSM growth will translate to future core earnings growth as well so I remain very optimistic about the prospects for.
Hong Kong, China, and Asia, and I will point out that actually in China, we hear about the potential stores to the recovery in China, but our second quarter was the strongest second quarter on record in China, and I think that does demonstrate the robust the emergence from the pandemic you referenced.
And the second component of your question, whether Q2 should be seen as abnormal.
I don't see it as abnormal that's full I see what we've experienced in the second quarter is a continuation of the momentum across Asia from the first quarter and as Colin mentioned, there is an uneven recovery from the pandemic across markets, but that's the benefit that we have of a diversified portfolio.
So and of course, an important driver of our growth in the second quarter as the mainland Chinese visitor customer segment to Hong Kong that has been very notable it's consistent with our strategy to capture a greater share of the MTV flows, but I don't want that to overshadow strong.
Domestic business strong domestic performance in Hong Kong.
And across Asia.
At the same statistic is true if we strip out the benefit that we've seen from mainland Chinese visitors, which I believe is sustainable, but if we strip that out we're still seeing high single digit growth rates in AP in the second quarter saw a strong domestic business in Hong Kong supplemented by incremental growth in mainland Chinese.
It is I believe is sustainable I don't think we will see the same levels of growth that we've seen in the first and second quarters, but I think this is.
Something that will continue to be in the run rate, reflecting the fact that the underlying customer needs remain in place in Hong Kong is right at the center of the Greater Bay area and Thats been formalized and really confirmed through government policies put in place during the pandemic.
Really here just a couple of adds to the core strength of our Asia franchise. Our AE. We are at scale. In fact, we're the third largest Pan Asian player that makes a big difference in terms of the ability to defray costs and actually continued to deliver momentum and then the second big advantage of our franchise is that were incredibly diverse both.
From a geographic perspective, but also from a channel perspective with good contribution from agency banker as well as direct now so that really does fill us with confidence as Phil highlighted.
Thanks for that and then my second question is on commercial real estate.
See higher cap rates as you highlighted have been a drag on returns I guess, what I want to understand better is if cap rates stop increasing and just kind of level out from here.
Would you be able to meet your long term return assumption do you think at this point on real estate or are we going to be in for sort of a longer period of below normal returns.
Yes, Hi, Paul It's Scott. Thank you for the question.
To your point there has been a couple of factors driving the underperformance in real estate versus assumptions. One has been obviously the stress in the office market.
A lot of the work from home reducing demand.
But it is hard to say, where that's going to go although we do see positive signs with companies like zoom coming back to the office, but the other one which is probably more in recent quarters, what's been driving it has been a rise in cap rates and there may be a little bit of continued pressure on that in the short run, but I'll remind you that rising cap rates are.
Mean that where we.
We're discounting at higher interest rates, the future cash flow off of those properties, so higher cap rates actually imply higher future returns. So I'm I'm very confident over the long term, we'll be able to achieve those those assumptions in the short term, obviously hard to predict in the short term, but there may be a bit more pressure in the coming quarters.
Alright ill leave it there thank you.
Thank you. Our following question is from Tom Mackinnon from BMO capital markets. Please go ahead.
Yes, thanks very much.
Question with respect to the Asia sales.
If I look at year over year, the 25% increase in the Asia AP E translates into 25% increase into the new business. CSM. This is all from page 22 of your Sip.
Are you getting a 3% year over year increase in your Asia, new business value.
No.
And help me understand the differences here is this.
CSM, obviously be a function of the sales here, but does the new whats difference.
And the calculation in the new business value with your capital take into account here just help me understand that.
And why is that so much lower than the growth in the CSM.
Hey, Tom This is Phil Thanks for the question.
Youre right to point out the growth in APE, and new business CSM, both growing 26% across the region.
3%, new business value growth and I'll hand over to Steve to comment further, but one thing that I will highlight is that new business CSM and NPV of both good metrics to look at as indications of the value that we generate from the growth that we deliver.
But there may be variations quarter to quarter and one thing to highlight with respect to 2023 versus 2022 is product mix and you may recall that a year ago. The voluntary health insurance scheme in Hong Kong was introduced that drove quite a lot of interest in health products in Hong.
Kong annually repriced, both short term product that for <unk> 17, therefore, it doesn't impact the CSM because it goes through the premium allocation approach model, but it is it was something that was reflected in new business value. So that's one thing that reflects the divergence in growth rate in 2002.
93 between the two metrics that Steve you may wish to comment further on the methodology.
Yeah, Tom I call your attention to the fact that total company level, we saw broad alignment between new business CSM growth at 15% <unk> growth at 12% and <unk> growth at 10%. So just under <unk> four Youll recall, we would see some variability between the new business.
<unk> and the NPV and similarly under our 2017, we will see some variability between new business CSM and NPV.
But over time, they will be directionally consistent and that's what you should expect to see in all of our business I just want to add to Phil's was we.
Also from higher interest rates, we increased risk discount rates.
In Asia, which.
With a slight headwind to back NPV. Thanks.
And then just as a follow up the NPV margins in Hong Kong, we are running like 80%.
And now there's 50% is there is there a business mix issue there.
And they haven't really moved quarter over quarter, despite the big jump in the sales.
Well. Thanks for the question Tom you are right to point that one out Hong Kong total Hong Kong total MBV margin approximately 50% just over 50% what's happening here is that we have seen a shift in business mix with the volume.
Having doubled.
In Q2, 2023 relative to the second quarter of 2022, a big driver of that being the Mcd customer segment important to note upfront that MTBE business is high quality business, it's profitable, but it has been lower margin than the rest of our business in Hong Kong and consistent with the rest of the industry.
In Hong Kong, we are seeing customer demand from mcd customers being skewed towards lower margin savings oriented products.
That is a notable difference from the pre pandemic period, where we saw greater demand for protection critical illness health products from the Mcd customer segment, and we do see an opportunity here to improve product mix helped our customers fulfill a wider range of that needs and that is something that could be a potential tailwind to our margin.
In the future really important to note as well, but our domestic business in Hong Kong remains very important it's been growing in a stable manner.
During the pandemic in fact, we've taken share domestically in this high margin business that we have in Hong Kong.
Relative to the first.
Relative to the second quarter of 2019, our business has actually grown domestic business has grown by 11%, whereas the market as a whole the domestic market has contracted by just over 20%. So I think that speaks to the quality of the underlying business, which is our highest margin business across the region.
I think I'll leave it at that time, but happy to take any further follow ups tomo I might just add as well that 50% MBV margin is incredibly high that's really solid and strong we're really very happy with our margins out of Hong Kong quite frankly out of Asia, and the 80% margin that you referred to is slightly elevated versus our more.
Average medium term MBV margin coming out of Hong Kong. So there is a bit of a comparison year on year that makes that look more dramatic than it actually is and it's still highlights.
Our focus is on growing MBV absolute obviously, we want to do that at high margins and we think there's more opportunity to continue to grow our margin as we have over the years.
Is the distribution of the Mcd business is that.
More broker related or more.
Of career agent related.
Okay. Thanks, Thanks for the follow ups on brokers are really important part of it but also agency.
An important part as well we have made some specific investments over the course of the pandemic in order to take a greater share of the Mcd customer segment, and we feel that's appropriate given that really the legitimization of this segment through the government policies that have been put in place over the course.
The pandemic and the important role that Hong Kong has to play in the development of the Greater Bay area. So some of the things that we've been doing we've opened customer service centers in places that are convenient for mainland Chinese customers.
Well is that we've been developing our hospital network in mainland China. In fact, we're a leader in that regards we have been enhancing.
<unk>.
The materials that we that we have into multilingual materials. So not just traditional Chinese for the Hong Kong domestic market, but also simplified Chinese as used in mainland China.
So things that we've been doing and in particular in agency, which is a really important channel for us in Hong Kong, we've been really looking at hiring a greater proportion of Mandarin speaking agents that we'll be able to interact more comfortably with mainland Chinese visitor customers.
Thanks for the color Phil.
Thanks, Tom.
Thank you.
Following question is from Gabriel <unk> from National Bank Financial Please go ahead.
<unk> got a strategy question in a numbers question and I'll start with a numbers one.
Your slide 25 pretty helpful very helpful actually.
Show the balance between experience items that go through P&L and then through the CSM, if we can drill down a little bit on some of the moving pieces.
Can you quantify the bigger pieces I'd like to know how the negative LTC experience.
It went through P&L positive through CFM, and then I guess some.
Individual life.
[noise] experience.
A bigger drag on the CSM as well so maybe we can just kind of breakdown some of the bigger bigger chunks flowing through the <unk>.
Graph.
Sure, Yes, thanks, Gabriel I'll I'll take that one Steve.
Start with LTC.
As you know overall up.
And I remind you that I look at.
Total experience it does show up.
P&L in CSM and I'll touch on that but total LTC experience was a modest gain in the quarter. The negative that went through P&L. That's the cash payments that we're making in the quarter, so higher cash benefit reimbursements than expectations, but that was more than offset by.
Favorable incidents experience.
Verbal lapse experience slightly offset by lower levels of mortality, if we look more broadly at some of the drivers overall.
Between the two sections.
$10 million in total pre tax impact.
What's going through the P&L, So I mentioned the LTC.
Overall, we had positive claims experience across a number of areas, including continued favorable experience in Canadian group benefits that was offset.
By expense results and then moving to the CSM. The two the two material drivers there of the experience.
One is adverse persistency primarily from Vietnam.
And the other is continued low lapse rates in the U S. Both of those trends are not not what we expect over the long term.
So I'll stop at that but happy to drill into more detail.
Some numbers, but.
The number of the army.
I think I mentioned the biggest the biggest drivers there okay.
Okay.
Now the strategy question.
Your one of your peers.
Hong Kong Canadian domiciled, one, but with operations in Hong Kong similar to you in the sense that you wanted to increase your mainland Chinese sales.
Sales to mainland Chinese.
Customers.
In Hong Kong.
Compared to what you did in the.
Prior years I'm wondering.
What the motivation is there just to get a better sense.
You know why that's driving the strategy makes sense now, whereas it didnt pre COVID-19.
Let me, let me start Gabriel and I will hand over to Phil. The first thing I'd say is that <unk> sales has always been part of our strategy. We have been focused on the.
The Chinese consumer that's been moving to Hong Kong or tapping into Hong Kong full their insurance and health needs and again, a core competency of our franchise is that we are diverse but we also have a strong presence both in Hong Kong and in China, which lends itself to capturing that segment and I would highlight that for us.
<unk> differentiated and why we think we can win and why are we quite frankly have won in the MTV space.
Our strong brands and having a strong brand in Asia makes a massive difference obviously being there for more than 127 years, and having established credibility with consumers and all other stakeholders really matters because people can trust us. We also aspire to have the best products in market and we have the best people. So I think those.
<unk> combinations.
Why we will continue to outperform in Asia and quite frankly in the MTV space. So it's always been a part of our focus.
And now with the reopening given that that marketed had gone away for some time wage is doubling down on it is the way I would position it but bill you might want to supplement that sure happy to and thanks for the question.
A supplement to what really has said the first thing and I referenced this a few minutes ago is really over the course of the pandemic the formalization of the greater Bay area framework.
Puts Hong Kong right at the center of the GPA and I think that that is something for us that provides us with confidence. This is a good market for us to capture strategically I think the second thing is that looking at the underlying cups excuse me looking at the underlying customer needs that exist within our Chinese mainland customers.
Mainland customers segment, those needs of that greater than ever before.
The need for long term savings for retirement, the need for health care and the need for critical illness, and it absolutely makes sense.
That's an appropriate market for us to capture and then the final point that I'll make is that given our scale position in Hong Kong, we have the capabilities we have the products.
It just makes strategic sense for us to scale that with the flows that are coming into Hong Kong through mcps MTV businesses.
What I will say is that we've seen a big surge in the first and second quarter I do expect that that.
That to be maintained but I don't expect those rates of growth.
To continue I think that rates of growth reflects a bounce back, but as we'd seen pre pandemic, there can be variation quarter to quarter and MTV volumes, but.
It's there over a long period of time and I expect the customer segment demand to continue.
Thank you.
Thank you.
The following question is from Mario Mendonca from TD Securities.
Please go ahead.
Good morning.
Going back to Asia for a moment.
The addition to stem from new business was obviously very strong this quarter and what I try to connect that something like insurance sales.
Hum.
Well guess what appear.
This quarter was far greater than the increase in insurance sales.
Am I missing something should I also be considering an.
In annuity sales or is it appropriate to just compare that.
And an increase to the insurance sales.
Hi, Mario its Phil Thanks for the question I would I would encourage you to look at <unk> sales in total taking into account both insurance and annuity sales the annuity sales as presented in the CIT.
Absolute dollar amounts not HPE and therefore, it can be skewed by single premium regular premium mix. So we look at AP sales as the key metric and that's been in aggregates as Steve mentioned earlier closely correlated between new business CSM and AP.
Do you agree with bill that this quarter the increase in new business CSM.
Was outsized relative to the increase in AP. It just appears that way.
I can see AP.
This quarter 879, very similar to last quarter, yet the increase in the CSM was from new business is far greater.
Yes.
And so with respect to Asia, and then hand over to Steve.
As directly.
Asking about Asia specifically.
Great for you I guess.
Yes, no problem Mario and then Steve May still wish to supplement.
There is.
There is a higher new business CSM. This quarter, we have made some refinements to our methodology, which have had a benefit but specifically for Asia.
If we strip out the impacts of those refinements, we'd still be seeing growth of approximately 20% of new business CSM, which is a strong demonstration of the value that we're driving so I agree with you Mario it's a little elevated this quarter, but I do expect to see strong new business CSM growth in the quarters to come but Steve your element nothing to add.
Yeah, sorry, Steve just so we're clear does that mean, there was like a one time catch up this quarter or is this the new sort of sustainable level of CSS, if <unk> were to be the same.
There was a modest catch up at year to take year to date catch up in the quarter on that some prior methodology, but.
So I still said it was still a very strong quarter of growth. So the year over year growth instead of 26% still would have been approximately or north of 20% so fairly.
That's helpful. Okay. So.
Another question I have and this is something we're seeing for all of the insurance companies. This growing disparity between.
Reported and core earnings its definitely not unique to manulife were seeing it across the board.
And what are the big differences. These expected returns on your assets are just so different from what's actually materializing. So what I wanted to do is think of all the portfolio of our model. We're looking at about a $53 billion portfolio. If the company were to reduce the expected return on the ALDA then presumably these these differences.
Would moderate somewhat but the trade off then of course is that if you reduce the expected return on the ALDA. Then your net investment income would go down so what I'm trying to understand is first of all have I characterize that right like if you reduce the ALDA return, there's no P&L impact immediately and it's just the ongoing lower net investment is that correct.
Mario Hi, its Scott. Thanks for the question, that's correct, but that we've tried to put in radar a return that we think we can achieve or exceed.
Through the cycle basis, and we have shown that we've accomplished that in the long term and we put the additional slide in the appendix at this time to show that not only in the long term, but over the last three and five years and there is going to be variability. This portfolio was mark to market every quarter and again from that slide you can see that variability quarter to quarter and we think that.
The right way to think about the ongoing earnings power of the company over time is to look at that return if we reduce that return.
We would show a lower underperformance in the quarters, where we are underperforming, but a higher over performance in the quarters, where we're outperforming and some that we would end up showing over time.
Higher net income relative to core which.
Which we don't think is appropriate we're trying to call it right down the middle and end up with core and net income would be the same overtime Martin.
I just.
Again, if you look at the last three years, which have been incredibly volatile years and look at our net income versus core and net income has actually been higher than core for those three years and for US the assumption itself should be what do we feel confident we can deliver over the longer period of time and as you've seen from our deck over $18 five years, we've delivered against the assumption.
And then we've looked at more recent time periods, which again have been very volatile three and five years, which you see in the appendix. We've also delivered against that assumption. So for us it's about making sure that we've got the assumption that makes sense.
And again in some quarters, we're going to be over and others will be under and Thats why we have a core metric because we don't think thats at the fundamental performance of the franchise.
That's helpful, but the only people that matter are the investors and if investors are blocked.
And again this is not unique.
True for everybody if investors are losing faith in this.
Expected versus actual.
Right.
Lead guys like me to have to just say okay forget.
Just come up with that number on our own for what investors are paying off.
Yes.
Yes.
Bottom line here is what is your outlook for second half of the year do these differences.
Core and reported do they start to attenuate somewhat.
Just sort of the name of the game for the next little while.
Yes, Hey, Mark it's Scott.
And.
Questions always come up when all of that has underperformed because assumptions. We've seen this before and then if you look at that graph, we had eight straight quarters, where we outperformed in these questions kind of go away and so.
While there is variability.
There is value to being in and all of the portfolio, which Collin articulated in his opening remarks, and I think you asked a good question last quarter. When you said well is that variability worth it and so.
That was again a bit of a motivation for that chart. We put in the appendix to show you exactly what that variability is and what the gross earnings are and those gross earnings are probably double the earnings on average we would have fully fixed income. So so yes, it's up to investors to decide but I think that given the extra.
Earnings we get versus fixed income is quite high I think it's worth it for that that variability and it's again why we would have you focus on core in any given quarter over the long term, it's certainly fair to compare net income to core but in any given quarter. That's why we have the core metrics.
Thanks.
Thank you.
<unk> question is from Nomura.
From <unk> Securities. Please go ahead.
Yes, Thanks, Alex take up that line of questioning on the ALDA portfolio.
I understand the point, you're trying to make on that I'll have a slide in the appendix, suggesting that.
The returns are solid over the past three and five year, so over the longer term.
It has been below the expectation for a full year now so I guess is there like a line in the sand that we can draw suggesting that.
Expected actual returns are below the expected for.
Let's say two years and you guys have to revisit the <unk>.
Return assumptions.
Archive that persists for two or even three years before you guys absolutely.
Revisit those assumption.
I'll leave it there and then I have a follow up.
Sure Scott again, thanks for the question.
We revisit those assumptions every year so every year.
My team works with Steve's team to look at historical returns to look at what the market's expecting on these things going forward and it has a very long term assumption so looking at any quarter or any given year is not really the right way to look at it and I would tell you I have more confidence in achieving those returns now.
Now after having underperformed over the last year a lot of that underperformance was driven by higher discount rates on these assets, which does weigh on valuations now, but higher discount rates and higher higher returns in the future. So.
Frankly in periods of underperformance I have more confidence going forward, it's almost the reverse if we outperform for awhile.
Because discount rates are down that's when we start to ask ourselves should we be bringing down the long term returns, but in this environment I'm very confident in achieving its long term returns and Lamar, It's Steve I'll chime in in.
In the past a lot of these questions came to me because if there was a change in assumptions that went through reserves, but I wanted to add as well that these assumptions are important for our product pricing et cetera, and just reinforcing Scott's point, it's a very thorough process that we go through each year to validate long term return assumptions and.
I won't repeat what Scott said, but I also have conviction in these assumptions that they are appropriate over the long term.
Okay. Thanks, and then.
Looking at your slide 17.
Your average ALDA return over the last 18 five years, so it's nine one.
Same slide you show that the S&P 500 was actually $9. Four is the right way to think about the value of all of that just being a lower standard deviation of these returns because I would expect there'd be an illiquidity premium to being invested in these all of that so like how do I answer that question from it from investors like why not.
Let's look at the S&P 500, and say all of the portfolio is underperforming that like where is the value inherent in your opinion.
Yes, Thanks, Great question and the S&P has performed very well over this time period, you look at the PSX and it Hasnt performed as well in other foreign markets and we're invested in public equities in different markets, depending upon where we do business. So I would say versus more global markets and are all of the portfolio.
Global portfolio. It has outperformed public markets, but to your point the real value is in the lower volatility.
If a tenant and investing that what you really want to look at is the amount of return you're getting per unit of risk and over the long term.
Are the volatility has been as you can see on this chart less about a third of the volatility of the public equity markets and in fact.
If we redid that chart over the last five years.
And had we been invested in the S&P 500, the S&P 500 actually would've outperformed on average, but the volatility was intense there would have been quarters, where we would have lost us like $6 billion because of the extreme volatility we've seen in that market over the last five years. So it is the lower volatility thats really the.
The powerful part of the portfolio and that's a function of a very diversified portfolio.
Six different categories that are not all are correlated and are staying at the low end of the risk return spectrum.
Thanks, and then my next question it wasn't long ago, where we were.
On wealth management.
Our momentum in the core EBITDA margins that are approaching.
The 30% range, but it looks like over the past few quarters, there's been a change we have to be thinking of it more in the kind of below 25% range I just wanted to revisit that assumption is there a path back to that.
Hi.
Low <unk> EBITDA.
EBITDA margins or is that off the table until we see more of a recovery in an industry industry trends in wealth management.
Yes. Thanks for the question, it's Paul here.
Still committed to the 30% margin and it probably would make sense to give you some context for what we saw year over year, and then what youre seeing from prior quarter.
We just take a step back to last year. There was there was a couple of items impacting the year over year in the first is we did have some repatriation of some seed assets in some alternative assets that were moved into a fund raise.
That and the other impact was the step up acquisition of annualized fund management in China, while Thats accretive to earnings there's a little bit of a drag on the overall margin in the short term, but we do expect that to be a tailwind over time. The combination of those two would have been about 100 basis points of the decline from last year. The remainder amount was really the.
<unk> of muted market growth as we continued to invest in the business and that brings you to a Q1 versus what youre seeing in Q2 and Q2, you're starting to see a lot of that come back for a number of reasons, but the primary reason is just the strong fundamentals of the business. There is one more day in Q2 versus Q1, that's worth about 30 basis points, but the remainder.
<unk>.
To 200 basis points, that's really just from the strong fundamentals of the business. You are seeing very strong flows again in a very difficult market. We've got a resilient net fee income yield you've seen some good expense management come through Q2 versus Q1, Youre seeing the margin come forward.
An improved because of that the other thing worth noting is when you look at the year over year comparison, we also did see a relatively.
Significant increase in expenses as markets open up travel opened up and we would not expect that continue and youre starting to see that moderate where we've been able to really pull that back in from Q2 versus Q1. So we would expect looking forward.
Can't control markets, but.
Our track record of positive flows the strong market share the consistency of.
Our net fee income youll positions us well to continue to drive this margin go forward and as I mentioned at the start we're still committed to that 30% margin, assuming we get back to regular market growth.
Thanks.
Thank you.
Our following question is from <unk> Kim from Credit Suisse. Please go ahead.
Hi, Thanks, Good morning, just a couple quick ones here or the expected credit loss line the benefit.
That we saw from parameters and model updates of $50 million in stage. One could you talk about the moving pieces in that line I'm just I'm just trying to get a sense of what drove that this quarter, whether it was improved.
Macroeconomic outlook or something else. Thanks.
Sure.
Thanks, Scott and thank you for the question and you have that right.
Way. The ECL works is we try to model out future credit losses, and that's a function of both.
The credit quality of the portfolio and how it's changed but also the current macroeconomic environment. So what goes into that model are things like the volatility of equity markets equity markets in general unemployment and all those parameters are most of those parameters on balance got a little bit better so that led to a little bit of a.
Sure.
In DCM.
Got it and just last one from me similar line of questioning just unexpected but at the top of the house when I when I look at your expense efficiency ratio target below 50%.
It was around I think 46% so far this year.
And when I look at it even in the prior it's been under your target for a number of quarters. So I'm just trying to get a sense.
What drove the good performance so far this year and if you would consider lowering back meet.
Medium term efficiency ratio target.
Yes. Thanks.
You're right to point out expenses this quarter on quarter improvement 200 basis points actually down to 45, 1% for the quarter. So we're pleased with that trajectory, but never satisfied.
And you're not going to announce a new target today, but really the drive for efficiency is really important for me personally and for the organization and we've got a great track record. When you look at the expense CAGR between 2019 and 2022, 1%.
So did allude to it a few quarters ago, a bit of a step up in absolute expenses, but the reality is as Paul also spoke to is that we.
We're starting to see a moderation of post pandemic expense activity and expense expense efficiencies just a real priority going forward and you're really here I'll just add to <unk> comments I think he is an idle nail on the head, but it has been a massive focus for our franchise and we're proud of the progress that we've made and we're not stopping if that's the.
Acacia in your question, we still feel that there is much more for us to do we've invested more than $1 billion to digitize, our business and we've seen that come through in our straight through processing metrics, where they've improved quite significantly in fact in 2018, only 68% of the transactions that we process, where digital straight through without any human intervention at the end of 'twenty two that caught up to 83.
Percent actually year to date this year, we're up a further 2% so those efforts to digitize our business really translating into that improvement and we still think that there's much more opportunity for scaled operation like ALS to continue to digitize, which not only gives us the cost benefits that you highlight but also translate into better customer experiences.
Which ultimately leads to satisfied customers and more product sales. So this is the journey that we're continuing and committed to.
Alright, thank you.
Thank you.
Our following question is from Doug Young from Desjardins Capital markets. Please go ahead.
Hi, good morning, just to kind of maybe follow up questions to earlier questions, but first as Steve on the unfavorable lapse experience in the U S that went through the CSM can you kind of dig a little bit more into that can you quantify it and where I'm going with this and obviously a secondary guarantee UL has been a hot topic.
And an area of some pressure for some of your peers in the U S is that where we're seeing the pressure and why shouldn't that be a concern for some investors.
Yeah.
Sure Doug.
Can dive into that one a little bit more and now I'll take you back to Jeff.
Just before the pandemic we had been.
As you know, we update assumptions frequently as experience emerges and before the pandemic. We are up to date on U S. Lapse assumptions, we had strengthened reserves there over the years, which you probably recall and then during the pandemic what we saw almost right away in 2000 was.
Disconnect in lapse rates on some of our products So protection products in the U S dropped down.
20%, we saw a similar phenomenon in.
In Canada with.
Some similar product design showing drops in lapse rates drop in lapse rates on variable annuities and.
What what we've seen since that time is.
In Canada and in particular in the past couple of quarters, we have seen a trend back to pre pandemic lapse rates.
In those product lines level, COI, UL and snack funds and also informing my views, which I'll get to us during the global financial crisis, while it was a different shock to the system. We saw similar types of discontinuities in lapse rates on different products and over time, those lapse rates trended back to pre shop.
Levels. So that continues to be my expectation in the U S is that we will see a trending back to U S lapse rates overtime to pre pandemic lapse rates overtime.
And so just to confirm this was related to the no lapse guarantee UL block is that.
Dana.
It would include the no lapse guarantee block as well, but we also have other protection products, where we've seen some similar trends. So I was just thankfully.
And can you quantify like is it just an immaterial amount.
It it's.
It is this is the key driver in terms of the CSM experience in the in the quarter for the U S that you can see on the.
In the results.
And I guess, the other thing I'd add remind you hit it on this on these protection products lapse rates are very low so we're not talking about it a change from 5% annual lapse rates to 3%. These are variable.
<unk> lapse rates those expected rates are below one and these are.
Small changes in lapse rates, but.
Capitalized over.
A long period of time, they can have an impact, but we'll wrap that with my conviction that I do expect those rates to trend back overtime.
Okay.
And then just maybe Phil.
Hong Kong I think we talked a bit about this meant sales are up 100% core earnings down 13% you talked about mix shift the margins down.
I guess slower amortization of the BSA is there anything else, that's really putting pressure on Hong Kong outside of those items and then with the BSA like if we see rates start to stabilize and maybe go the other way is that something that could be a bit of a tailwind can you quantify maybe the better way to think of it how can you quantify how big the slower amortization of DSA.
He is actually had on Hong Kong or on the Asia business.
Sure. This is Phil thanks for the question.
Core earnings in Hong Kong, you do highlight the 13% decline relative to second quarter of 2002, I will point out the stability sequential stability with Q1, which is important in the context of the point you made in the first quarter that you just highlighted there was a headwind coming from slower amortization of CSN.
In response to higher interest rates and I'll, let Steve comment on how we expect that to trend prospectively.
A few moments, but in terms of other things going on under <unk> 17, we typically expect stable, but growing earnings to emerge as new businesses put on the books and CSM builds what we've seen over the course of the pandemic is slower level lower levels of new business than we would typically expect.
As well as the impact of the macro environment on the CSM balance the inorganic movements in the CSM balance and that is translating to a headwind in terms of core earnings growth in Hong Kong and across other markets as well. However from here our focus is very much on the underlying commercial drivers of that.
And you see that coming through in the second quarter with the new new business CSM growth, but also the organic CSM growth, 11% annualized in the second quarter and this will translate to future core earnings growth for the Asia segment. So I remain optimistic that we'll see core earnings expansion.
In future quarters, but at this point I'll hand over to Steve to comment on the amortization methodology sure. Thanks, Phil and yes, the slower CSM amortization on DSA contract that is impacting.
Each of the insurance segments to differing degrees.
As noted earlier the benefits of higher interest rates, so significant benefit in total for the company of about $110 million pretax relative to prior year Q2 embedded that in that as a headwind of approximately $60 million pretax from this lower amortization.
However, going forward, we are looking at our methodology on an amortization, we implemented a refinement to our methodology. So that going forward, we would expect materially less variability in CSM amortization due to interest rate changes. So Q2 of this year is.
A good run rate going forward that we will grow off of as we continue to write profitable business.
Okay. That's good color and if I can sneak one more in just I think they are talking about or have implemented fee caps in China are yet.
Kevin Correct me, if I'm wrong.
You've obviously spanned in wealth management.
In China, what implication does that have for the Grad business.
Yeah.
Yes. Thanks for the question, it's Paul here, yes, so the regulator did impose some caps or an equity funds and the intent of that is to encourage more investors to come into the market which over the.
Medium to long term will be good for the industry and for us from our perspective, it's not material to the <unk> business in terms of what Theyre doing there and it doesn't change kind of our outlook and product pipeline and if you look at our focus globally is an organization one of our big strengths as global fixed income and particularly Asia fixed income and we think we're well positioned to capitalize on that in the market. So it.
Team there is taking that and looking at whether it would have any material impact on their product plans and the answer to that is now so we don't see a material impact to us there were still very optimistic about.
The acquisition of our partner there and the plans we have go forward in the product pipeline, we have for the second half of the year.
As most of the focus more on the fixed income side. So we feel good about the progress going forward.
I appreciate the color. Thank you.
Okay.
Thank you.
<unk> question is from Nigel D'souza from Veritas investment research. Please go ahead.
Good morning. Thank you for taking my question I had some follow up questions for you first on <unk>.
The commercial real estate portfolio.
I think last quarter, you mentioned specific market go to fair value.
Losses, there I think Chicago is one of the markets you singled out were there any specific markets.
The impact this quarter or was it broad based across the portfolio.
And from what I Recollect I think you mentioned that you didn't expect takes another.
Fair value.
Yes, right down here.
Loss unless market conditions deteriorated. So my understanding was cap rates were mostly fully reflected Ohio calculate multi fully reflected in Q1. So just some additional color there would be helpful.
Sure Nigel yes, thanks for the question it's Scott.
So.
In our commercial real estate, we are seeing.
Broad based.
Weak weaker valuations as cap rates rise across the board I'll remind you that as Colin mentioned over 95% of the portfolio is externally appraised each quarter. So we are up to date on our valuations, but the appraisers are still trying to figure out where this market should settle they've continued to raise.
Cap rates, So office is a little bit worse for sure, but we are seeing pressure across industrial across multifamily.
In all the different North American geographies, I would say, our Asian portfolio, which is 28% of our real estate portfolio has actually held up fairly well.
And really the question going forward everyone's trying to figure out is are we done and we do feel like the majority of that raising of cap rates is done, but it may not be fully done and it will be a function of where long term rates go. So there may be.
A little bit of weakness going forward, but we wouldn't expect a similar amount of weakness that we saw in the first half of the year.
Okay and then the second question was just.
Circling back to expected investment earnings.
Any sizing of the caution of course, that's already rolled over to higher reinvestment yields just trying to get a sense of the remaining runway here and.
Comparing the earnings on surplus.
Just wanted to clarify that the reason we aren't seeing a step up in earnings.
Surplus quarter over quarter.
Due to high interest cost system.
That's helpful.
Yeah, It's Scott I'll take the turnover question I think what you've seen is is first of all.
We hold as you would expect prudently a decent amount of cash in that.
That has earnings range on that has gone up tremendously over the past year, and maybe even a little bit more recently.
And so that's that's always turning over at current current short term rates for the long term portfolio, we have a very long portfolio to prudently match, our long liabilities. So the vast majority of the portfolio has not turned over but it's not going to turnover.
A tremendous amount in a given quarter or given year I think the average duration of our portfolio interest rate duration is something like 12 years. So that's that's about how long it takes to turn the whole thing.
Nigel just on your higher interest on surplus, it's 94 million higher year on year, but that has been offset by higher cost of variable debt, which is 32 million. So you do actually see the number in the core earnings. It's just partially offset by higher cost of debt.
Okay, and just a quick clarification there.
Yeah.
From the comments on.
Portfolio turnover is at this time I understand correctly that it's actually the shortening of the curve.
That's benefited that line item over the recent quarters and there was a greater I guess.
As to the short end of the curve or.
I'm not understanding the dynamic there.
Yes, I think I think the short end going up a lot has certainly helped the cash earnings for sure. That's been a tremendous increase but rates are up everywhere. So while we do long investing and if.
If we as those as those assets turnover, if we kept them shorter we could probably earn more in the short run but that would not be a prudent match against our liability. So we do reinvest them long term and long term rates are a lot higher now than they were before even though the yield curve is inverted.
Okay. That's it for me thank you.
Thank you.
Following question is from Darko <unk> from RBC capital markets. Please go ahead.
Hi, Thank you good morning, and I promised I do have a long term view on stuff, but I'm going to focus a little bit on the short term.
Today, and I thought I heard somewhere in prepared remarks that.
My first question is around commercial real estate.
Values dropping by about 30% in the U S. I think I heard that correctly.
I'm not I'm not an expert so I'm looking for a little bit of color around that in other words. You also just mentioned it was 95% externally.
Raised so it was 30%.
Kind of in line with what we're seeing.
At most other places is there any benchmarks you can provide even internally.
How does that compare to your Canada Asia portfolio of commercial real estate.
And maybe lastly, a little bit of color.
Around that would be would that Mark also include one use commercial real estate. So just looking for some color that tells me.
You are absolutely are conservative on the CRE portfolio.
Would be helpful. Thank you.
Sure. Thanks Darko.
So yes, you heard correctly Collins opening remarks there.
Our U S real estate portfolio U S office real estate portfolio, which is which is only 5% of the overall of the portfolio. It was a much higher percent. If you went back post the GSC we sold over.
$3 $5 billion worth of North American office in the last five years. So we really have dramatically reduced but still when it dropped 30% that's going to kind of hit your income a bit and and yes, we do have over 95% of the portfolio appraised externally each quarter. So we <unk>.
The valuations are absolutely up to date, but that doesn't mean, there could be additional pressure going forward and as I said earlier I do think the pressure we're seeing at this point is more broad based.
In terms of rising cap rates as opposed to an asset class where people are concerned about higher vacancies going forward, which was certainly the case for U S office now we do have a.
Diversified portfolio.
28% of the portfolio is in Asia, the balances in the U S and Canada in Asia. There arent the same pressures on office. There people are continue to go into the office and so we haven't seen much if any valuation drops in Asia would not really expect to going forward in <unk>.
We've seen in certain markets like Singapore.
Actually increased appraisals, given given the dynamics there and yes. There's this office in that 5% of the U S would include.
The stuff that we occupy and so.
That's probably down a little bit less given that the.
You wouldn't expect a big vacancies there going forward, but rent rental levels are down because vacancies are up.
Our businesses will benefit from that we will charge them.
Lower rents as rents come down and that gets capitalized into into the values of real estate. So it does it does include the home office real estate in and I guess finally.
We are using external appraisals, we think that's largely what people would say they would expect U S office Broadway to be down about 30%.
If you look at some of.
Some competitors out there, it's may be down a little bit less than 30%, but.
I don't know if they all used external appraisers and are completely up to date and we feel like we are.
Very up to date on that doesn't mean, there couldnt be further weakness, but we feel we're up to date.
Okay. That's really helpful. Thank you for the extra color and a follow up question is.
With respect to the lending that you do.
Against portfolios of commercial real estate, specifically office not small in your portfolio.
And the reason why I'm asking this question as a cover banks and we're all under <unk> nine accounting and if I really wanted to do every quarter I can look up the stage two.
Reserve so to speak.
Org.
It would be more broadly based but I can look at it in banks offer up ltvs on that portfolio of the offer up delinquency.
Movements in stage, two and so I'm surprised when I see the expected credit loss basically being nothing overall this quarter.
Sure.
The company considering that there is some stress in that portfolio or at least as of now.
Outside observer, I think theres some stress so can you speak to maybe the stage two reserve you have against that portfolio.
Delinquencies their LTV anything else that you could offer on the.
The direct mortgage portfolio that has office exposure.
And how well reserved you are and what that portfolio kind of looks like right now.
Yes, Thanks, Thats a really good question, obviously real estate and office in particular is under pressure now.
Our commercial mortgage portfolio is 7% of our overall portfolio in office loans are only 2% of the overall portfolio. So it's not a very large exposure and I would say when you compare insurance companies to banks, we tend to be as an industry pretty conservative lenders. So I would expect.
And you saw this in the GSE you would expect insurance companies to do better than the <unk> market, which is a more aggressive lending market and the banks.
If you look at our portfolio.
It is currently and we revalued all the properties, we're doing that now on a quarterly basis, it's at a 59% loan to value. So on average it's in good shape now there can be pockets of weakness.
And different markets certainly office, if you look at our office alone. It's a 64% on average still a very comfortable number but there are pockets of stress.
Okay.
End of <unk>.
June a reporting period, we didn't actually have any delinquencies in the portfolio, but I do expect those to arise and so we have.
<unk> put up some impairments some stage three impairments and some stage two which is more stage. Two is more of a downgrade stage III is where youre putting up a specific provision we did in the first quarter put up some we put up some in the second quarter as well that was then.
Then the modeling, which we talked about earlier in the model inputs reduce that back to about it.
So I think we've been prudent in trying to get ahead of what's coming at us by putting up some impairments in that portfolio, even though we did not have any delinquencies.
And we will continue to be under pressure, but I guess my final message is both as an industry the insurance industry and.
And specifically we are conservative lenders in a market that is having a little bit of stress.
Okay. That's also helpful color. Thank you.
Thank you we have no further questions at this time I would now like to turn the meeting over to Mr. Cole.
Thank you operator will be available after the call. If there are any follow up questions have a good day everyone.
Thank you.
The conference has now ended.
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